Tag: Ind AS 21 the effects of changes in foreign exchange rates

Ind AS 12, “Income Taxes,” addresses the accounting for income taxes, which includes both current and deferred tax. The recognition, measurement, and accounting of current tax effects under Ind AS 12 involve specific considerations to ensure that the tax expense or benefit in the financial statements accurately reflects the period in which the underlying income or expenses are recognized.

Recognition of Current Tax

1. Basic Principle:

Current tax for current and prior periods shall, to the extent unpaid, be recognized as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess shall be recognized as an asset.

2. Tax Expense (Benefit):

The tax expense (benefit) related to profit or loss includes the amount of current tax payable (recoverable) in respect of the taxable profit (tax loss) for a period.

Measurement of Current Tax

1. Calculation Basis:

The measurement of current tax liabilities (assets) is based on the tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. The computation of taxable profit (tax loss) involves applying tax rates to the accounting profit (loss) and making adjustments for items that are tax-deductible or taxable in different periods, or not at all.

2. Use of Estimates:

The calculation of current tax may involve estimates if the taxation authorities have not finalized an assessment for the period. Any difference between the tax finally assessed and the amount previously accounted for is adjusted in the period in which the assessment is finalized.

Accounting of Current Tax Effects

1. Recognition in Profit or Loss:

Current tax expense (benefit) is usually recognized as part of the profit or loss for the period. However, tax related to items recognized outside profit or loss (either in other comprehensive income or directly in equity) is also recognized outside profit or loss accordingly.

2. Adjustments of Prior Periods:

Corrections of errors or adjustments of estimates related to prior periods are recognized as part of the current period’s tax expense (benefit). This ensures that the tax expense (benefit) reflects the latest information available.

3. Tax Payable and Receivable:

The amount of current tax payable (receivable) is included in the balance sheet as a tax liability (asset) unless the tax is withheld at source and cannot be refunded.

4. Offsetting:

Current tax assets and liabilities can only be offset if there is a legally enforceable right to offset and the amounts are related to taxes levied by the same taxation authority.

5. Disclosure:

Entities are required to disclose the major components of tax expense (income) and the relationship between tax expense (income) and accounting profit in financial statements. This includes explaining any significant estimates and judgments made in determining the current tax expense (benefit).

Determining the tax rate for calculating deferred tax according to Ind AS 12, “Income Taxes,” is a critical step in the measurement of deferred tax liabilities or assets. Deferred tax accounts for the future tax effects of current transactions and events, and its calculation is based on the difference between the carrying amount of assets and liabilities in the financial statements and their tax base. The tax rate used should reflect the rates that are expected to apply in the period when the asset is realized or the liability is settled.

1. Enacted or Substantively Enacted Tax Rates

Deferred tax assets and liabilities should be measured at the tax rates that have been enacted or substantively enacted by the reporting date. An enacted tax rate is one that has been formally passed into law. A substantively enacted rate is one that has advanced to the point where further progression is virtually certain, even if it has not been formally enacted by the reporting date.

2. Expected Tax Rates

The measurement should be based on the tax rates (and tax laws) that are expected to apply in the period when the deferred tax liability is settled or the deferred tax asset is realized. This expectation should be based on the tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period.

3. Consideration of Future Changes

If specific changes in the tax rates or tax laws are announced, substantively enacted, or enacted by the reporting date, these should be considered in the measurement of deferred tax. This includes understanding when these changes are expected to take effect and applying them to the periods in which temporary differences are expected to reverse.

4. Different Tax Rates

If different tax rates apply to different levels of taxable income or to different categories of taxpayers, the rate to be applied is the rate expected to apply to the taxable income of the periods in which the deferred tax asset or liability is expected to be settled or realized. This requires an estimation of the taxable income in future periods.

5. Tax Rate Variability

For entities operating in multiple jurisdictions, the tax rate used for calculating deferred tax should reflect the tax rate of the jurisdiction in which the entity operates and generates taxable income. If there are different rates for different types of income or transactions, the appropriate rate is the one that applies to the temporary differences that are being reversed.

6. Measurement Reflection

The measurement of deferred tax liabilities and assets must reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. This includes considering the tax consequences of the way assets are expected to be realized or liabilities to be settled, such as through use or sale.

Measurement of Deferred Tax:

The measurement of deferred tax involves calculating the tax effect of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their tax bases. Ind AS 12, “Income Taxes,” provides the framework for this calculation, focusing on the deferred tax liabilities and assets that result from those temporary differences.

Temporary Differences

First, identify the temporary differences. These differences may arise due to the different treatment of items for accounting and tax purposes. Temporary differences can be:

• Taxable temporary differences: Differences that will result in taxable amounts in future periods when the carrying amount of the asset or liability is recovered or settled.
• Deductible temporary differences: Differences that will result in amounts that are deductible in future periods when the carrying amount of the asset or liability is recovered or settled.

Tax Rates for Measurement

Deferred tax assets and liabilities should be measured using the tax rates that are expected to apply in the period when the asset is realized or the liability is settled. The rates used must be those that have been enacted or substantively enacted by the reporting date.

Recognition of Deferred Tax Assets

Deferred tax assets should be recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized. The future realization of the deferred tax asset depends on whether there is sufficient taxable profit expected in the future.

Measurement Techniques

The measurement of deferred tax liabilities and assets should reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. This involves:

• Using appropriate tax rates: As mentioned, the rates should be those enacted or substantively enacted by the reporting date.
• Tax base determination: The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
• Valuation allowances: If it is not probable that some or all of a deferred tax asset will be realized, a valuation allowance is recognized to reduce the deferred tax asset to the amount that is probable to be realized.

Reassessment

Entities must reassess at each reporting date the likelihood of realizing the deferred tax asset. Changes in circumstances that affect the entity’s ability to generate sufficient taxable profits in the future could lead to adjustments in the recognition of deferred tax assets.

Presentation

Deferred tax liabilities and assets are presented in the statement of financial position as non-current. However, the classification of deferred tax assets and liabilities into current and non-current is not required under Ind AS.

Disclosures

Ind AS 12 requires disclosures that enable users of financial statements to understand the relationship between the tax expense (income) and accounting profit, and the nature and amounts of deferred tax liabilities and assets.

Recognition and Accounting of Deferred Tax:

The recognition and accounting of deferred tax involve principles established under Ind AS 12, “Income Taxes.” This standard addresses how to account for the current and future tax consequences of:

• The future recovery (realization) of the carrying amount of assets or liabilities that are recognized in an entity’s balance sheet, and
• Transactions and other events of the current period that are recognized in an entity’s financial statements or tax returns.

Recognition of Deferred Tax Liabilities

Deferred tax liabilities are recognized for all taxable temporary differences, with certain exceptions. A taxable temporary difference is the amount by which the carrying amount of an asset or liability in the balance sheet exceeds its tax base. The recognition of deferred tax liabilities reflects the fact that the entity will pay more tax in the future as a result of these differences.

Exceptions include:

• Deferred tax liabilities from the initial recognition of goodwill.
• Deferred tax liabilities from the initial recognition of an asset/liability in a transaction that:
  • Is not a business combination, and
  • At the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

Recognition of Deferred Tax Assets

Deferred tax assets are recognized for all deductible temporary differences, unused tax losses, and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carryforward of unused tax losses and unused tax credits can be utilized. The criteria for recognizing deferred tax assets include reviewing whether sufficient taxable profit will be available in the future against which the temporary differences can be utilized.

Key Considerations for Recognition:

• Assessing the probability of future taxable profits against which the deferred tax assets can be utilized.
• Considering the strategies and tax planning opportunities that could make the realization of deferred tax assets more likely.

Measurement

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Reassessment

Entities should reassess the carrying amount of a deferred tax asset at each reporting date. The entity should reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized.

Accounting Treatment

Deferred tax assets and liabilities should be adjusted in the period in which the change in tax rates or tax laws occurs. The effect of the change on deferred tax assets and liabilities is recognized in profit or loss for the period, except to the extent that it relates to items previously charged or credited directly to equity or other comprehensive income.

Presentation

Deferred tax assets and liabilities are presented in the statement of financial position as non-current assets and liabilities. They are not discounted to present value. The offsetting of deferred tax assets and liabilities is only permitted if the entity has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to taxes levied by the same taxation authority on the same taxable entity or on different taxable entities that intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously.

Disclosures

Ind AS 12 requires entities to disclose the amount of deferred tax assets and liabilities, the movements during the period, and the components of tax expense (income) in the financial statements. Additionally, entities should disclose the nature of the evidence supporting the recognition of deferred tax assets, particularly when the realization of deferred tax assets is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences.

Practical Application Deferred Tax arising from a Business Combination:

Deferred tax considerations are critical in business combinations, as outlined in Ind AS 103, “Business Combinations,” and Ind AS 12, “Income Taxes.” The acquisition method, used in accounting for business combinations, often results in the recognition of assets and liabilities at their fair values. This revaluation can create temporary differences between the carrying amounts of assets and liabilities for accounting purposes and their tax bases. These temporary differences may lead to the recognition of deferred tax liabilities or assets.

Identifying Temporary Differences

The first step is to identify temporary differences that arise from the business combination. This involves comparing the tax bases of the acquired assets and liabilities to their recognized amounts in the financial statements post-acquisition. Common areas where temporary differences arise include:

• Intangible assets: Fair value adjustments to intangible assets, such as trademarks and customer relationships, often have no tax base or a different tax base, leading to temporary differences.
• Property, plant, and equipment (PPE): Revaluations of PPE to fair value can result in temporary differences if the tax base does not change accordingly.
• Inventories: Adjustment of inventories to fair value may also create temporary differences.

Recognition of Deferred Tax

For each identified temporary difference, the entity must recognize a deferred tax liability or asset. The recognition criteria and measurement principles follow Ind AS 12:

• Deferred tax liabilities are recognized for taxable temporary differences, except for certain exemptions such as goodwill.
• Deferred tax assets are recognized for deductible temporary differences to the extent that it is probable that future taxable profits will be available against which the deductible temporary difference can be utilized.

Measurement

Deferred tax assets and liabilities arising from a business combination are measured at the tax rates that are expected to apply in the periods when the assets will be realized or the liabilities settled. The measurement reflects the entity’s expectations, based on the tax laws that have been enacted or substantively enacted by the acquisition date.

Goodwill

One of the complexities in business combinations is the treatment of goodwill. Under Ind AS 103 and Ind AS 12, goodwill is initially measured as the excess of the consideration transferred over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If a deferred tax liability is recognized for the future taxation of excess values of identifiable assets over their tax bases, this decreases the amount of goodwill recognized. Conversely, the recognition of a deferred tax asset (for example, due to the recognition of a deductible temporary difference) increases the amount of goodwill recognized, subject to the asset’s recoverability.

Practical Example

Assume Company A acquires Company B for ₹1,000,000. Among the assets acquired are patents valued at ₹200,000 for accounting purposes but with a tax base of zero. Assuming a tax rate of 30%, a deferred tax liability of ₹60,000 (₹200,000 * 30%) would be recognized. This deferred tax liability reflects the future tax consequences of recovering the patent’s carrying amount, which is higher than its tax base. The recognition of this deferred tax liability would adjust the amount of goodwill or bargain purchase gain recognized in the business combination.

Ind AS 32, “Financial Instruments: Presentation,” provides guidance on the presentation of financial instruments, particularly how to classify them as liabilities or equity, and the associated information that should be disclosed in the financial statements. While the standard covers the presentation aspect, the de-recognition of financial assets and liabilities is actually addressed in more detail under Ind AS 109, “Financial Instruments,” which builds on the principles set out in Ind AS 32.

The principles of de-recognition for both financial assets and liabilities under Ind AS 109 are centered on the transfer of risks and rewards for assets, and the extinguishment of obligations for liabilities. These principles ensure that the financial statements accurately reflect the entity’s control over financial assets and its obligations for financial liabilities at any point in time. Proper de-recognition accounting is crucial for presenting the true financial position and performance of an entity, ensuring transparency and reliability in financial reporting.

De-recognition of Financial Assets

De-recognition of a financial asset occurs when the rights to receive cash flows from the asset have expired, or the entity has transferred the asset and substantially all the risks and rewards of ownership. Ind AS 109 outlines the following criteria for de-recognition of a financial asset:

1. Transfer of Rights:

If an entity transfers its rights to receive cash flows from a financial asset, it evaluates whether it has transferred substantially all risks and rewards of ownership.

2. Retention of Risks and Rewards:

If the entity has retained substantially all risks and rewards of ownership of the financial asset, it continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.

3. Partial Transfer:

If the entity has neither transferred nor retained substantially all the risks and rewards of ownership, it considers whether it has retained control of the asset. If it has not retained control, it de-recognizes the asset to the extent of the consideration received. If it has retained control, it continues to recognize the financial asset to the extent of its continuing involvement.

De-recognition of Financial Liabilities

A financial liability should be de-recognized when it is extinguished – that is, when the obligation specified in the contract is discharged, canceled, or expires. The key points regarding the de-recognition of financial liabilities in Ind AS 109 are:

1. Settlement:

An entity de-recognizes a financial liability from its balance sheet when the obligation under the liability is discharged or cancelled, or expires.

2. Exchange or Modification:

If an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability. The difference between the carrying amount of the original financial liability and the consideration paid is recognized in profit or loss.

Ind AS 8, “Accounting Policies, Changes in Accounting Estimates and Errors,” provides guidance on the selection and application of accounting policies, along with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates, and corrections of errors. The standard is aimed at enhancing the relevance and reliability of an entity’s financial statements and ensuring comparability over time and with other entities’ financial statements.

Key Provisions of Ind AS 8

Accounting Policies:

• These are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.
• When a Standard or an Interpretation specifically applies to a transaction, other event, or condition, the accounting policy or policies applied to that item shall be determined by applying the Standard or Interpretation.
• In the absence of an Ind AS that specifically applies, management uses its judgment in developing and applying an accounting policy that results in information that is relevant and reliable.

Changes in Accounting Policies:

• Can only be made if required by an Ind AS or if the change results in the financial statements providing reliable and more relevant information about the effects of transactions, other events, or conditions on the entity’s financial position, financial performance, or cash flows.
• The change is applied retrospectively, and the effect of the change is adjusted in the opening balance of retained earnings of the earliest period presented.

Changes in Accounting Estimates:

• These are adjustments of the carrying amounts of assets or liabilities, or the amount of the periodic consumption of an asset, that result from the assessment of the present status and expected future benefits and obligations associated with assets and liabilities.
• Changes in accounting estimates are applied prospectively by including them in the profit and loss for the period of the change, if the change affects that period only, or in the period of the change and future periods if the change affects both.
• These changes are not corrections of errors but are the result of new information or developments and, therefore, are not applied retrospectively.

Errors Disclosures of Changes in Accounting policies

Changes in Accounting Policies

When there is a change in accounting policy, either due to a new standard or interpretation or a voluntary change for more relevant and reliable information, Ind AS 8 requires the following disclosures:

• The Nature of the Change in Accounting Policy:

A description of the change and the reasons why the new accounting policy provides reliable and more relevant information.

• The Amount of the Adjustment:

For the current period and each prior period presented, the amount of the adjustment to each item affected in the financial statements, including the effect on basic and diluted earnings per share if applicable. If it is impracticable to determine the amount of an adjustment for one or more prior periods, that fact should be disclosed.

• The Amount of the Adjustment Relating to Periods Before Those Presented:

A description of how the change in accounting policy affects the financial statements, including the total adjustment to each financial statement line item and to basic and diluted earnings per share for the periods before those presented, if practicable. If not practicable, this should be stated.

• If Retrospective Application is Impracticable:

An explanation and description of how the change in accounting policy was applied.

Correction of Errors

For the correction of material prior period errors, Ind AS 8 requires disclosures similar to those for changes in accounting policies:

• The Nature of the Prior Period Error:

A clear description of the error and the fact that it is a correction of a prior period error.

• For Each Prior Period Presented in Comparative Information:

The amount of the correction for each financial statement line item affected and the correction of basic and diluted earnings per share. This disclosure is required for each prior period presented.

• The Cumulative Effect of the Error on Periods Before Those Presented:

If it is practicable to determine the amount of the correction, disclose the cumulative effect on the periods before those presented. If not, this fact should be disclosed.

• If Retrospective Restatement is Impracticable:

When it is impracticable to determine the amounts to be restated for one or more prior periods, an entity should disclose that fact and explain why applying the retrospective restatement is impracticable.

Ind AS 10, “Events after the Reporting Period,” provides guidance on the treatment and disclosure of events that occur between the reporting period end and the date the financial statements are authorized for issue. Understanding its scope, definitions, types of events, and required disclosures is crucial for ensuring financial statements accurately reflect the entity’s position and performance.

Ind AS 10 ensures that financial statements reflect events that occur after the reporting period and that are relevant to the understanding of the financial position and performance of the entity. Adjusting events require adjustments to the financial statements, whereas non-adjusting events may necessitate disclosures to inform users about significant events that could impact their understanding and assessment of the financial statements. By adhering to these requirements, entities enhance the transparency and reliability of their financial reporting, thereby aiding stakeholders in making informed decisions.

Scope

Ind AS 10 applies to all recognized and unrecognised events that occur between the end of the reporting period and the date when the financial statements are authorized for issue. It impacts the adjustments to the amounts recognized in financial statements and the disclosures related to those events.

Definitions

• Events after the Reporting Period:

Events, both favourable and unfavourable, that occur between the end of the reporting period and the date the financial statements are authorized for issue.

• Adjusting Events:

Events that provide evidence of conditions that existed at the end of the reporting period.

• Non-adjusting Events:

Events that indicate conditions that arose after the reporting period.

Types of Events

Adjusting Events:

• Settlement of a court case that confirms the entity had a present obligation at the end of the reporting period.
• Receipt of information about the impairment of an asset.
• Bankruptcy of a customer that occurs after the reporting period but confirms that the customer was in serious financial difficulty at the end of the reporting period.

Non-adjusting Events:

• Dividends declared after the reporting period.
• Natural disasters that occurred after the reporting period.
• Major purchases of assets or disposals of assets, business combinations, or disinvestments.

Disclosure Requirements

For All Events after the Reporting Period:

1. Date of Authorization:

Disclose the date on which the financial statements were authorized for issue and who gave that authorization. If the entity’s owners or others have the power to amend the financial statements after issuance, that fact should be disclosed.

For Adjusting Events:

2. Nature and Effect:

Adjust the financial statements to reflect the adjusting events. Although specific disclosures for each adjusting event are not mandated by Ind AS 10, the nature of the adjustment and its financial effect, if material, should be disclosed as part of the relevant notes for the affected financial statement items.

For Non-adjusting Events:

3. Nature of the Event and Estimate of its Financial Effect:

If non-adjusting events are of such importance that non-disclosure would affect the ability of the users of financial statements to make proper evaluations and decisions, the following should be disclosed:

• The nature of the event.
• An estimate of its financial effect, or a statement that such an estimate cannot be made.

Examples of Disclosures for Non-adjusting Events:

• If a dividend is declared after the reporting period, the entity discloses the dividend declared but not recognized as a distribution to equity holders.
• In the case of a major business combination after the reporting period, disclose its nature and, if possible, an estimate of its financial effect.
• For a significant natural disaster, disclose the nature of the event, its financial effect (if estimable), and any possible impacts on the entity’s operations.

Considerations for Preparing Disclosures:

When preparing disclosures for events after the reporting period, entities should consider the relevance and necessity of the information to the users of the financial statements. The goal is to provide clarity about the entity’s financial position and performance, taking into account significant events that occurred after the reporting period. Disclosures should be made in a manner that is understandable, relevant, reliable, and comparable.

Ind AS 113, “Fair Value Measurement,” outlines the framework on how to measure fair value for financial reporting. It does not dictate when an entity should use fair value, but rather, it sets out how to measure fair value when its application is required or permitted by other Ind AS standards.

Ind AS 113 ensures that fair value measurement and disclosure are standardized across entities, enhancing comparability and transparency in financial reporting. By providing a detailed framework for measuring fair value and requiring comprehensive disclosures, Ind AS 113 helps users of financial statements to understand the judgments and estimates involved in fair value measurements and the effect of fair value measurements on financial position and performance. The standard’s emphasis on market participants’ perspective, the principal (or most advantageous) market, and appropriate valuation techniques ensures that fair value measurements reflect current market conditions and expectations.

Scope

Ind AS 113 applies when another Ind AS requires or permits fair value measurements or disclosures about fair value measurements and disclosures, except in specified cases such as share-based payment transactions under Ind AS 102, leasing transactions under Ind AS 17, and measurements that have some similarities to fair value but are not fair value (e.g., net realizable value).

Definitions

• Fair Value:

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

• Market Participants:

Buyers and sellers in the principal (or most advantageous) market for the asset or liability that have a reasonable understanding of the asset or liability and are able to enter into a transaction for it.

• Principal Market:

The market with the greatest volume and level of activity for the asset or liability.

• Most Advantageous Market:

The market that maximizes the amount that would be received for the asset or minimizes the amount that would be paid to transfer the liability, after considering transaction costs.

Unit of Account

The unit of account is determined based on the level at which an asset or liability is aggregated or disaggregated for recognition purposes under other Ind AS standards. This concept affects the identification of the asset or liability for which fair value is to be measured.

The Transaction

Fair value measurement assumes a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability.

Market Participants

Fair value measurement considers the characteristics of the asset or liability from the perspective of market participants who have the ability and willingness to transact for that asset or liability.

The Price

The transaction to sell the asset or transfer the liability takes place either in the principal market for that asset or liability or, in the absence of a principal market, the most advantageous market.

Fair Value at Initial Recognition

When an asset is acquired or a liability is assumed, the fair value at initial recognition is usually the transaction price. However, if the transaction is not considered to be at arm’s length, adjustments may be necessary.

Valuation Techniques

Ind AS 113 categorizes fair value measurement techniques into three broad approaches:

• Market Approach:

Uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets and liabilities.

• Cost Approach:

Reflects the amount that would be required to replace the service capacity of an asset (replacement cost).

• Income Approach:

Converts future amounts (cash flows or earnings) to a single current (discounted) amount.

Disclosures

Ind AS 113 requires entities to disclose information that helps users of financial statements assess both of the following:

• The techniques and inputs used to develop fair value measurements.
• For recurring fair value measurements using significant unobservable inputs (Level 3 of the fair value hierarchy), the effect of those measurements on profit or loss or other comprehensive income for the period.

Specific Disclosure requirements:

• The fair value hierarchy of the inputs used to determine fair value (Levels 1, 2, and 3).
• For Level 3 fair value measurements, a reconciliation of the opening balances to the closing balances, disclosing separately changes during the period attributable to realized and unrealized gains or losses, purchases, sales, and settlements.
• The amount of total gains or losses for the period included in profit or loss that is attributable to assets and liabilities held at the reporting date and categorized within Level 3 of the fair value hierarchy, and where these gains or losses are presented in the statement of comprehensive income.
• The valuation processes used by the entity.
• For non-recurring fair value measurements categorized within Level 3 of the fair value hierarchy, the narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs and any interrelationships between those inputs.

Ind AS 33, “Earnings per Share (EPS),” prescribes the calculation and presentation of earnings per share to improve comparability of performance among different entities and over different periods. EPS is a key indicator used by investors to assess the profitability of an entity on a per-share basis, making it crucial for entities to calculate and present this metric consistently.

The standard requires entities to present both basic and diluted EPS on the face of the statement of profit and loss. Basic EPS is calculated by dividing the net profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. This provides a straightforward measure of performance that all entities can calculate.

Diluted EPS takes into account the potential dilution that could occur if convertible instruments or contracts to issue shares were converted into ordinary shares. It reflects the potential decrease in earnings per share that could result if options, warrants, or convertible securities were exercised or converted into shares. The calculation of diluted EPS involves adjusting both the numerator (earnings) and the denominator (number of shares) to reflect the potential dilution.

Ind AS 33 ensures that users of financial statements have a consistent basis for comparing the performance of entities, taking into account both the actual and potential impacts on shareholders’ equity.

Key Scope Inclusions

• Publicly Listed Companies:

Ind AS 33 applies to entities with shares listed on a stock exchange or that are in the process of listing.

• Entities with Ordinary Shares:

The standard covers entities that have issued ordinary shares to the public or have the potential to issue such shares.

• Diluted and Basic EPS:

Requires the presentation of both basic EPS and diluted EPS for entities that have potential ordinary shares, ensuring a comprehensive view of earnings per share.

Scope Exclusions

While Ind AS 33 has a broad application, there are specific exclusions:

• It does not apply to interim financial reports, unless such reports are presented alongside or included within annual reports.
• The calculation and disclosure requirements are not mandatory for entities that do not have equity shares or potential equity shares listed or in the process of listing in a public market.

Earnings per Share (Ind AS 33) Measurement:

The measurement of Earnings per Share (EPS) as prescribed by Ind AS 33 involves specific methodologies for calculating both basic and diluted EPS. These calculations allow users of financial statements to gauge the performance of an entity on a per-share basis, providing critical insights into its profitability.

Basic EPS

• Formula:

Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the parent entity by the weighted average number of ordinary shares outstanding during the period.

• Profit or Loss:

This refers to the net profit or loss for the period attributable to ordinary shareholders, after deducting any dividends on preferred shares or other amounts that are not available to ordinary shareholders.

• Weighted Average Number of Shares:

The denominator is the weighted average number of ordinary shares outstanding during the period, adjusted for changes in the share capital (such as bonus issues, share splits, or share consolidations) without an equivalent change in resources.

Diluted EPS

• Objective:

Diluted EPS shows the potential impact on EPS if all dilutive potential ordinary shares were converted into ordinary shares. It provides a worst-case scenario for EPS under the assumption of full conversion or exercise of all dilutive instruments.

• Formula:

Diluted EPS is calculated by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of shares for the effects of all dilutive potential ordinary shares.

• Adjustments to Profit or Loss:

Adjustments include interest on dilutive potential ordinary shares (e.g., convertible debt) and the effect of other changes in income or expense that would result from the conversion of the potential ordinary shares.

• Adjustments to Shares:

The weighted average number of shares is adjusted to include the additional ordinary shares that would have been outstanding if the dilutive potential ordinary shares had been converted into ordinary shares.

Considerations for Measurement

• Anti-dilutive Potential Shares:

Not all potential ordinary shares are included in the diluted EPS calculation. If their conversion to ordinary shares would increase EPS or decrease loss per share, they are considered anti-dilutive and are excluded from the diluted EPS calculation.

• Complex Financial Instruments:

For instruments that could be converted into shares, such as convertible bonds or options, entities must calculate their dilutive potential. This involves determining the number of shares that could be obtained at no additional cost and adjusting both earnings and the number of shares accordingly.

Presentation

• Separate Presentation:

Basic and diluted EPS must be presented for each class of ordinary shares that has a different right to share in the entity’s net profit for the period. These figures are presented on the face of the statement of profit and loss.

• Continuing and Discontinued Operations:

If an entity presents a separate income statement, it must present basic and diluted EPS for both continuing and discontinued operations either in that statement or in the notes.

• Negative EPS:

Entities should present EPS data even if the amounts are negative, indicating a loss per share.

Disclosures

The disclosures required under Ind AS 33 ensure that users of financial statements have sufficient information to understand the basis of the EPS figures presented and to evaluate the entity’s future earning potential. Key disclosures include:

• Reconciliation:

A reconciliation between the numerator used in calculating both basic and diluted EPS to the net profit or loss attributable to ordinary shareholders. This includes detailing the adjustments made for the calculation of diluted EPS.

• Weighted Average Number of Shares:

Details of the weighted average number of ordinary shares used as the denominator in calculating basic and diluted EPS, and an explanation of changes in these numbers.

• Effect of Dilutive Potential Ordinary Shares:

Information on potential ordinary shares that were not included in the calculation of diluted EPS because they were anti-dilutive for the periods presented, but could potentially dilute basic EPS in the future.

• Descriptions of Instruments:

Descriptions of the nature and terms of share-based payment arrangements that could potentially dilute basic EPS in the future or that have changed during the period.

• Adjustments for Changes in Capital Structure:

If there have been changes in the entity’s capital structure that would affect the comparability of EPS, the entity should describe the nature of the change and consider adjusting the EPS of prior periods presented.

Interim Periods

While Ind AS 33 does not mandate interim period EPS disclosures, entities that choose to disclose EPS in interim financial reports should apply the same principles and methods for calculating basic and diluted EPS as they do for annual periods.

Ind AS 108, “Operating Segments,” prescribes the requirements for the disclosure of financial information about an entity’s operating segments. It is aimed at enhancing the transparency of financial reporting and helping users of financial statements to better understand the performance of an entity, assess its prospects for future net cash inflows, and make more informed judgments about the entity as a whole.

Key Principles

• Reportable Segments:

Ind AS 108 requires entities to report financial and descriptive information about their reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria concerning their revenue, profit or loss, or assets.

• Identification of Operating Segments:

Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker (CODM) in deciding how to allocate resources and in assessing performance. This approach is known as the ‘management approach’, where the identification of operating segments is based on the way that financial information is organized and reported to the CODM within the entity.

• Segment Reporting:

The standard requires entities to disclose specific information about each reportable segment, including revenue from external customers and intersegment revenue, a measure of segment profit or loss, segment assets, and the basis of segmentation and the types of products and services from which each reportable segment derives its revenues.

• Measurement:

The amounts reported for each operating segment are measured on the same basis as those used by the CODM for making decisions about allocating resources to the segment and assessing its performance. The standard allows a certain degree of flexibility in measurement, acknowledging that the information reviewed by the CODM may not always be prepared in line with the accounting policies applied for the consolidated financial statements.

• Entity-wide Disclosures:

Besides segment information, Ind AS 108 also requires entity-wide disclosures that give information about the entity’s products and services, the geographical areas in which it operates, and its major customers. This is to ensure that even if entities have a single reportable segment or do not allocate some items to segments, users of the financial statements still receive a level of information about the entity’s different revenue streams, the geographical spread of its operations, and its reliance on major customers.

Ind AS 108’s requirements ensure that an entity discloses information about its operating segments in a manner that reflects the internal reports that are regularly reviewed by its CODM. This approach is intended to provide users of financial statements with information that is used by management to evaluate the performance of the entity’s business and make decisions about the allocation of resources.

Scope Inclusions:

• Publicly Traded Entities:

The standard primarily targets entities with public accountability, defined by their engagement in trading equity or debt instruments in public markets or being in the process of issuing such securities. This includes companies listed on stock exchanges and companies in the process of going public.

• Entities Preparing Financial Statements under Ind AS:

It applies to entities that are required to, or choose to, prepare their financial statements according to Ind AS, providing a framework for segment reporting that aligns with international financial reporting standards.

Scope Exclusions:

• Non-public Entities:

While the standard is primarily aimed at publicly traded entities, non-public entities are not expressly excluded. However, the emphasis on public accountability means its requirements are most relevant to entities with securities traded in public markets. Non-public entities may still find the principles of segment reporting useful for internal management purposes and may voluntarily apply Ind AS 108 to their financial reporting.

• Consolidated Financial Statements:

The requirements of Ind AS 108 are applied in the context of consolidated financial statements of a group with a public accountability focus. However, the principles could also be informative for the separate financial statements of individual entities within a group, particularly if those entities have public accountability.

Entities not within the scope of Ind AS 108, such as private companies without public trading of their securities and not in the process of issuing such securities in public markets, are not required to apply the standard’s segment reporting requirements. However, adopting some of its principles could enhance the transparency and usefulness of financial information provided to owners and other stakeholders.

Discontinued Operations Disclosures

For disclosures specifically related to discontinued operations, entities should refer to Ind AS 105, which requires detailed disclosures that enable users to assess the financial effects of disposals and discontinued operations. These disclosures:

• The description of the discontinued operation and the facts leading to the expected disposal.
• The financial performance of the discontinued operation, including revenue, profit or loss before tax, the income tax expense, and the gain or loss recognized on the re-measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation.
• The segment in which the discontinued operation was reported as per Ind AS 108, if applicable.

Operating Segments Disclosures under Ind AS 108

Within the context of operating segments as defined in Ind AS 108, the standard requires entities to disclose:

• Factors used to identify the entity’s operating segments.
• Types of products and services from which each operating segment derives its revenues.
• The amounts of segment revenue, segment profit or loss, segment assets, segment liabilities, and other significant items. These amounts are measured on the basis used by the chief operating decision maker for making decisions about allocating resources to the segment and assessing its performance.
• Reconciliations of the totals of segment revenues, reported segment profit or loss, segment assets, segment liabilities, and other significant items to corresponding entity amounts.
• Information about major customers, if applicable.
• Information regarding the geographical areas in which the entity earns revenues and holds assets, as well as information about major customers.

If an entity has reported a discontinued operation as per Ind AS 105, the implications for segment reporting under Ind AS 108 would involve ensuring that the disclosures for operating segments reflect the changes in the entity’s structure, including the impact of any discontinued operations. This might include adjusting the segment information presented in prior periods for comparability purposes or disclosing the effects of discontinued operations on the reported segment data if significant.

Ind AS 24, “Related Party Disclosures,” mandates the disclosure of related party relationships, transactions, and outstanding balances, including commitments, in the financial statements of entities to provide a clearer understanding of the financial position and performance of the entity. This standard is crucial as transactions with related parties might not be conducted under the same terms and conditions as transactions with unrelated parties, potentially leading to financial positions or performances that differ from those involving independent parties.

The primary objective of Ind AS 24 is to ensure that an entity’s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances with such parties.

Related parties under Ind AS 24 include, but are not limited to, directors, key management personnel, shareholders with significant influence over the entity, and family members of these individuals. It also covers entities that control, are controlled by, or are under common control with the reporting entity (this includes subsidiaries, associates, joint ventures, and post-employment benefit plans).

Disclosures required by Ind AS 24 encompass the amount of the transactions, outstanding balances and their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and details of any guarantees given or received. The reporting of related party transactions must be made separately for each category of related parties.

Ind AS 24 helps stakeholders assess the impact of related party relationships and transactions on the financial statements, enhancing transparency and comparability. By requiring detailed disclosures, the standard aims to mitigate the risks of entities engaging in unfair practices or not conducting transactions at arm’s length, thereby safeguarding the interests of all stakeholders.

Related party disclosures (Ind AS 24) Scope:

Scope Inclusions

1. All Entities:

Ind AS 24 applies to all entities that prepare financial statements in accordance with Indian Accounting Standards (Ind AS), regardless of the type of entity (e.g., public, private, governmental, non-profit).

2. Related Party Relationships:

Includes relationships between the entity and its subsidiaries, associates, joint ventures, key management personnel, significant shareholders, and family members of these individuals or groups.

3. Transactions and Balances:

Covers all transactions and outstanding balances with related parties, including sales, purchases, leases, transfers of resources, services, obligations, and loans.

Scope Exclusions

While Ind AS 24 has a broad application, certain exclusions are noted within the standard:

• Dealing with Government:

Disclosures relating to transactions with a government that controls, jointly controls, or significantly influences the reporting entity are not required beyond what is stipulated in specific situations outlined by the standard.

• Benefit Plans:

The standard exempts certain disclosures in the financial statements of state plans or government-related defined benefit plans.

Key Points

• Comprehensive Coverage:

The standard aims to capture a wide array of relationships and transactions to prevent entities from omitting significant related party transactions that could influence the financial statements.

• Focus on Disclosure:

The primary focus is on disclosing information that could impact users’ understanding of the financial statements, rather than dictating the terms or conditions under which related party transactions should occur.

• Exemption Criteria:

While the scope is broad, Ind AS 24 also specifies situations where certain disclosures are not required or are simplified to avoid excessive burden without compromising the quality of information provided to users.

Understanding Relationship between Reporting entity and a Person/other entity:

The relationship between a reporting entity and a person or another entity, as outlined in Ind AS 24, “Related Party Disclosures,” is crucial for understanding the dynamics that influence financial transactions and the presentation of financial statements. These relationships are significant because they might lead to transactions that would not have occurred with unrelated parties or might have been conducted under different terms and conditions. Identifying and disclosing these relationships helps users of financial statements assess the financial position, performance, and cash flows of an entity.

Types of Related Party Relationships

1. Control Relationships:

These involve entities over which the reporting entity has control, joint control, or significant influence, and vice versa. This includes parent companies, subsidiaries, joint ventures, and associates.

2. Key Management Personnel (KMP):

Individuals who have the authority and responsibility for planning, directing, and controlling the activities of the reporting entity, directly or indirectly. This includes both executive and non-executive directors, as well as other persons holding similar positions.

3. Close Family Members of Individuals:

Family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity. This typically includes children, spouses, or domestic partners and might extend to other relatives who are financially dependent on the individual.

4. Entities with Common KMP or Significant Shareholders:

Entities that are significantly influenced by or have the power to significantly influence the same person or entity. This can also include entities that share key management personnel or significant shareholders.

5. Post-Employment Benefit Plans:

For the benefit of employees or the key management personnel of the reporting entity or an entity related to the reporting entity.

Understanding the Relationships

• Control and Influence:

The essence of many related party relationships is the ability to control or significantly influence financial and operating policies of another entity. This control can be direct or indirect and may not necessarily involve a majority ownership.

• Financial Interdependency:

Related parties might be involved in financial interdependencies, including providing guarantees, loans, or capital support, which may not reflect arm’s length transactions.

• Key Management Personnel:

The influence of KMP extends beyond the activities directly within their job descriptions to include broader financial relationships and transactions in which they might be involved, directly or indirectly.

• Transparency and Disclosure:

Understanding these relationships is critical for the transparency of financial reporting. Ind AS 24 requires disclosures that help users understand the potential impact of related party transactions and outstanding balances on the financial health and performance of the entity.

The framework set by Ind AS 24 for identifying and disclosing related party relationships and transactions is designed to ensure that financial statements reflect the true economic substance of an entity’s dealings, thereby enhancing the reliability and comparability of financial information across entities.

Under Ind AS 103, “Business Combinations,” both Non-controlling Interest (NCI) and Goodwill (or Bargain Purchase) calculations play crucial roles in the accounting of business combinations. These elements reflect the value of the acquired business that is not directly attributable to the acquirer’s shareholders and the excess value paid or acquired in a transaction, respectively.

Non-controlling Interest (NCI)

NCI is the portion of the equity (net assets) of a subsidiary not attributable, directly or indirectly, to the parent company. Ind AS 103 provides two methods for measuring NCI at the acquisition date:

1. Fair Value Method:

NCI is measured at its fair value at the acquisition date. This method may include the fair value of any previously held equity interest in the acquiree. The fair value of NCI includes the proportionate share of the acquiree’s identifiable net assets.

2. Proportionate Share Method:

NCI is measured at its proportionate share of the acquiree’s identifiable net assets. This method excludes goodwill.

The choice of method affects the amount of goodwill recognized in the business combination.

Goodwill Calculation

Goodwill arises when the consideration transferred in a business combination exceeds the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, measured at their fair values.

Calculation of goodwill involves the following steps:

1. Determine the Consideration Transferred:

This includes the sum of the fair values of assets transferred, liabilities incurred to the former owners of the acquiree, and equity interests issued by the acquirer.

2. Measure the Fair Value of NCI:

Depending on the chosen method (fair value or proportionate share), calculate the fair value of NCI at the acquisition date.

3. Recognize and Measure Identifiable Assets and Liabilities:

Identify and measure at fair value the identifiable assets acquired and liabilities assumed at the acquisition date.

4. Calculate Goodwill:

Goodwill is calculated as follows:

Goodwill = Consideration Transferred + Fair Value of NCI + Fair Value of any Previously Held Equity Interests – Net Identifiable Assets Acquired

Bargain Purchase Gain Calculation

A bargain purchase occurs when the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed, measured at their fair values, exceeds the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree, and in a business combination achieved in stages, the fair value of the acquirer’s previously held equity interest in the acquiree. The resulting gain is recognized in profit or loss.

• Calculate the Excess:

Determine the excess of the net identifiable assets over the sum of the consideration transferred, the fair value of any previously held interest, and the fair value of NCI.

• Recognize the Bargain Purchase Gain:

If there is an excess, reassess the identification and measurement of the acquiree’s assets, liabilities, and contingent liabilities and the measurement of the consideration transferred. If the excess still exists after reassessment, recognize the gain in the acquirer’s profit or loss.